In re Wegrzyn

• Decision Date: 28 March 2003
• Docket Number: No. 02-41807-HJB.,02-41807-HJB.
• Citation: 291 B.R. 2
• Parties: In re William J. WEGRZYN, Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

291 B.R. 2

In re William J. WEGRZYN, Debtor.

No. 02-41807-HJB.

United States Bankruptcy Court, D. Massachusetts.

March 28, 2003.

Joseph B. Collins, Esq., Hendel & Collins, P.C., Springfield, MA, for debtor.

David W. Ostrander, Esq., Ostrander Law Office, Northampton, MA, Chapter 7 Trustee.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is an "Objection to Debtor's Amended Exemptions" (the "Objection") filed by the Chapter 7 trustee (the "Trustee"). The debtor, William J. Wegrzyn (the "Debtor"), has filed a response (the "Response"). At issue is whether monthly proceeds paid to the Debtor from a privately purchased disability insurance contract are wholly exempt as a "disability benefit" pursuant to 11 U.S.C. § 522(d)(10)(C) or partially exempt as a "payment under a plan or contract on account of disability" under § 522(d)(10)(E). For the reasons set forth below, the Court SUSTAINS the Trustee's Objection in so far as it holds that § 522(d)(10)(C) is inapplicable and that income streams from a privately purchased disability insurance contract are exempt only to the extent reasonably necessary for the support of a debtor and his or her dependents pursuant to § 522(d)(10)(E).

I. FACTS AND POSITIONS OF THE PARTIES

The Debtor is retired from practice in dentistry and suffers from disabling health problems related to an advancing disease. On March 25, 2002, the Debtor filed a voluntary petition for relief in this Court under Chapter 7 of the Bankruptcy Code. According to the Debtor's schedules, his sole source of income derives from monthly distributions of disability related benefits. He collects monthly payments from two private disability insurance policies with the Metropolitan Life Insurance Company and UnumProvident Corporation, respectively. The monthly distributions from those policies total $6,916 (the "Insurance Proceeds"). The Debtor also collects $1,477 monthly in Social Security Disability Payments (the "SSD payments"), for a total monthly income of $8,393. Having elected the federal exemptions pursuant to § 522(b)(1), the Debtor listed in his amended Schedule C the two privately purchased disability insurance policies as wholly exempt under both §§ 522(d)(10)(C) and 522(d)(10)(E).¹

Aside from the Insurance Proceeds and SSD payments, the Debtor also owns a two family house in Chicopee, Massachusetts (the "Property"). According to the Trustee, the Debtor does not reside there, although he makes monthly mortgage payments of $1,800 on the Property. (Hearing Tr. at 4.) The two units on the Property are occupied by the Debtor's godmother and the Debtor's son, respectively, rent free. Id. Were rent to be collected on those two units, the Trustee estimates that the Debtor would have the benefit of a minimum of $1,000 in additional monthly income. Id.

Although the Trustee does not generally object to the Debtor's exemption of some portion of the Insurance Proceeds, he contends that § 522(d)(10)(C) does not apply. That subsection exempts a debtor's right to receive "a disability, illness, or unemployment benefit," with no limitation as to its amount. 11 U.S.C. § 522(d)(10)(C). The Trustee maintains that § 522(d)(10)(C) applies not to privately purchased disability insurance proceeds, but to government benefits and short-term, temporary employment related disability benefits.² Privately funded or long-term disability benefits, on the other hand, are exempt as a "payment under a ... plan or contract on account of ... disability" pursuant to § 522(d)(10)(E) and, therefore, may be exempted only to an amount "reasonably necessary for the support of the [D]ebtor and his dependents." 11 U.S.C. § 522(d)(10)(E).

The Trustee cites to Sheehan v. Lincoln Nat'l Life Ins. Co. (In re Morehead), 283 F.3d 199 (4th Cir.2002), as support for his position and suggests that the Morehead analysis also leads to the more equitable result. In Morehead, the 4th Circuit Court of Appeals reasoned that benefits such as social security and welfare are inherently limited in amount and can thus be assumed to be no more than reasonably necessary for a debtor's support. Id. at 206. Under this logic, it follows that Congress saw no need to add language expressly limiting the amount of those exemptions. On the other hand, Congress added express limitation language in subsections relating to other benefits which were not inherently limited in amount. Id.

The Trustee claims that the Insurance Proceeds fall under a category of benefits that are not inherently limited in amount and, consequently, are subject to the limiting provisions of the exemption statute. He points to the fact that the Debtor's annual income from both the SSD Payments and the Insurance Proceeds exceed $100,000, tax free. Further, the Debtor has no dependents (other than possibly his former spouse) and may obtain additional income from collection of rent on the residential property in which the Debtor does not reside. Accordingly, the Trustee claims that, notwithstanding the Debtor's considerable health problems, the $6,916 in monthly disability insurance payments, when combined with his other sources of income, may still exceed the amount reasonably necessary for his support and the support of any dependent. The Trustee requests an evidentiary hearing to determine the appropriate amount to be exempted under § 522(d)(10)(E).

In his Response, the Debtor maintains that the Insurance Proceeds are fully exempt under § 522(d)(10)(C) and that the income streams from the Debtor's private disability insurance policies fall squarely within the plain meaning of that statute as a "disability benefit." The Debtor first dismisses the Morehead decision as illogical and founded on little or poorly selected precedent. He then describes each of §§ 522(d)(10)(C) and 522(d)(10)(E), and essentially concludes that, under the plain meaning of the term "disability benefit" under § 522(d)(10)(C), "all disability benefits, illness benefits, and unemployment benefits are exempt in full. There is no qualification in these exemptions and the language is not ambiguous." (Debtor's Resp. at 9.) Essentially, the Debtor's argument is circular. He claims the Insurance Proceeds are "disability benefits" and not "payments under a contract on account of disability" because it is a "disability benefit." No meaningful distinction between § 522(d)(10)(C) and § 522(d)(10)(E) is provided.

II. DISCUSSION

The issue in this case presents a question of first impression in this district. Indeed, only a handful of courts have specifically addressed the question of whether private disability insurance benefits are exempt under § 522(d)(10)(C) or § 522(d)(10)(E). See In re Morehead, 283 F.3d 199; In re Bari, 43 B.R. 253 (Bankr.D.Minn.1984); Sanders v. Sanders, 711 A.2d 124 (Maine 1998).

At the outset, this Court finds the Debtor's proffered interpretation of the interplay between §§ 522(d)(10)(C) and (E) unconvincing. The Debtor's argument fails to address the key question in controversy in this case, namely what, in specific and concrete terms, differentiates a "disability benefit" under § 522(d)(10)(C) from a "payment under a contract on account of disability" under § 522(d)(10)(E). A cogent distinction between these two terms must be delineated so that the Court may reach a principled decision as to whether private disability insurance benefits are fully exempt under the former or only partially exempt under the latter. Furthermore, taking the Debtor's argument to its logical conclusion would lead to the inference that subsection (E)'s "similar plan or contract ... on account of disability" language is redundant, as subsection (C)'s broad language encompasses all types of disability "benefits." Yet, this conclusion would directly conflict with the basic principle that statutes should be read to avoid interpretations rendering statutory terms a surplusage. In re Rousey, 275 B.R. 307, 316 (Bankr.W.D.Ark.2002).

The Debtor's struggle in articulating a meaningful and consistent method of differentiating between benefits falling under § 522(d)(10)(C) from those falling under § 522(d)(10)(E) is understandable, given the exemption statute's cryptic and seemingly overlapping and contradictory language. Courts attempting to categorize exemptions under the different provisions of § 522(d)(10) have struggled to find guidance in navigating its language. Indeed, one Court has stated that "[p]arsing exemption claims concerning ... disability payments is like hacking one's way through a thicket." Sheehan v. Lincoln Nat'l Life Ins. Co. (In re Morehead), 257 B.R. 449, 454 (N.D.W.Va.2001) (quoting In re de Kleinman, 172 B.R. 764, 776 (Bankr.S.D.N.Y.1994)); see also In re Dale, 252 B.R. 430, 435 (Bankr.W.D.Mich.2000) rev'd on other grounds, In re Dale, 43 Fed.Appx. 911 (6th Cir.2002). This Court agrees with that categorization.

Section 522(d)(10)'s legislative history adds to the confusion by failing to distinguish between the specific types of property deemed to be fully or partially exempted by the section. The comment to § 522(d)(10) lumps "benefits" and "payments" under a general umbrella definition of "benefit." More importantly, the comments to the section refer to both subsections (C) and (E) as exemptions of disability related "benefits:"

Paragraph (10) exempts certain benefits that are akin to future earnings of the debtor. These include social security, unemployment compensation, or public assistance benefits, veteran's benefits, disability, illness, or unemployment benefits, alimony, support, or separate maintenance (but only to the extent reasonably necessary for the support of the debtor and any dependents of the debtor), benefits under a certain stock bonus, pension, profitsharing, annuity or similar plan based on illness, disability, death, age or length of service.

H.R.Rep. No. 95-595, at 126 (1977), reprinted in 1978 U.S.C.C.A.N. at 6087 (emphasis supplied).

Thus, according...